No abstract

No abstract

This paper argues that a generalized model of social preferences must simultaneously pass two tests; the Variety test (explain outcomes under variety, the V-test) and the Sen’s Weak Equity Axiom test (the S-test). It is shown that none of the models proposed to date unconditionally passes these tests. The paper extends the Fehr and Schmidt model of inequality aversion to a generalized model of inequity aversion which passes the two tests and parsimoniously explains interior outcomes in the dictator game and dynamics of outcomes in other games. This is done through introducing equity-bias in the Fehr and Schmidt model. The paper postulates that a player’s idea of equitable distribution is state-dependent, where the state is determined by psychological and structural parameters. The state could be fair, superior or inferior. Individuals in a fair state have zero equity-bias and split the pie evenly; those in a superior (inferior) state have positive (negative) equity-bias and accept more (less) than fair distributions as equitable

This article provides evidence on the gift exchange anomaly using standard field data on the performance of Islamic insurance (takaful) operators (TOs). Takaful is a type of mutual insurance where policyholders insure each other and hire an operator to manage operations against a hybrid of financial incentives. These incentives include an upfront agency fee, which is found to have an inverted U-shaped relationship with performance of TOs. We use our results to identify an optimal hybrid contract for TO and find optimal agency fee as a percentage of net earned premium.

The discipline of economics started as a moral science but became detached from moral concerns over time to emulate natural science and to adopt positivism. Consequently, mainstream economics assumes people to be sordidly selfish. The teachings of Islam, however, promote social preferences where individuals should be other‐regarding and have preferences over social outcomes. This paper replaces the selfish agent with a social agent and presents the results in a theorem referred to as the third fundamental theorem of welfare economics (TFTWE). The TFTWE states that “when the selfish agents are replaced with the social agents, market outcomes are Pareto optimal, equitable, and unique”. This is an important result which has widespread implications. We show that the TFTWE holds under conditions where the first two fundamental theorems of welfare economics fail and that a Walrasian equilibrium is more likely to exist when selfish preferences are non‐convex. Unlike the popular convention, there is no equity‐efficiency trade‐off. In fact we point to the possibility of reversal in equity‐efficiency trade‐off.